Be Wary of Kape's Webselenese Acquisition

Updated: Mar 9, 2021

Kape Technologies, the AIM-listed consumer identity cyber security firm, made an announcement today that it will be buying Webselenese, a digital platform that provides independent and highly valued consumer privacy and security content to millions of users globally via market-leading review sites. Kape’s shares responded fantastically to the news of the transformative acquisition, rising by 29% to end the day at 247p. On the face of things, the acquisition is both earnings accretive (it will boost Kape’s earnings this year) and a strategically smart play. But, before we get all giddy about the potential of synergies, cross-selling between platforms and opportunities for growth, in the words of Gregory Issacs, ‘let's cool down the pace!’.

Firstly, let’s look at some excerpts from the announcement from Kape.

Webselenese’s mission is to provide honest and unbiased information via its well-regarded websites that have received thousands of positive user-generated reviews. Webselenese was founded with the goal to provide best-in-class consumer-focused privacy and security related news and product information to users across the globe. Its team of researchers extensively research and test every product before reviewing and recommending it, in doing this, Webselenese only recommends products and services that its writers would use themselves, providing it with a key competitive advantage that has attracted a range of featured vendors (including Kape, McAfee, NortonLifeLock and Dashlane).

Through its global infrastructure, Webselenese has built a unique insight-driven content platform specifically designed to attract readers organically with over 105 million readers in 2020. This knowledge and technology will provide Kape with a unique competitive advantage in growing sales of its product suite.

So, to remove the technical jargon from this explanation of Webselenese’s business, Webselenese is essentially an independent comparison tool, which through its various websites such as vpnMentor provides unbiased and honest reviews of consumer cyber security technologies. Kape is a provider of cyber security software through its solutions such as Zenmate and Cyberghost, which are aimed at personal consumer security. For many years, Kape was a client of Webselenese, advertising as a vendor on its web platforms.

As the above description from Kape alludes, the deal makes economic sense. Webselenese grew revenues by 91% in 2020. It is also a very profitable company, with a growing customer base and good EBITDA margins (roughly 50%) — it will be immediately accretive to Kape’s earnings profile. If all goes well integrating the acquisition into Kape’s core business, I think the 28% rise in Kape’s share price today is justified.

However, there is one catch! To compare Kape’s purchase of Webselenese to another market for easier understanding, this acquisition would be akin to Hilton or Intercontinental Hotels purchasing the likes of Tripadvisor. The competitive advantage that Kape is discussing above is equivalent to the competitive advantage that the Hilton Corporation could leverage by analysing all of the customer data from Tripadvisor and using this information to boost its own ‘independent’ ratings! In this sense, Kape's decision to acquire the independent, unbiased, review platform sounds like a fantastic strategic move. However, there will be two challenges that present themselves.

Firstly, the Competition and Markets Authority. The UK’s competition body regulates such transactions and often intervenes in cases that may either be anti-competitive or result in a worse deal for consumers. I see a big conflict of interest with this acquisition and I am sure it will raise eyebrows at the CMA for both of the above criteria.

Secondly, there is the challenge of Webselenese retaining credibility as an independent and trusted authority by its user base when it has been acquired by one of its key vendors. Webselenese are clearly aware of this conflict of interest as they have posted the following statement on their website post the acquisition announcement:

vpnMentor is proudly unbiased; the information here is unaffected by the commissions we get when a purchase is made using some of our links. We take pride in the fact that, although Cyberghost, Zenmate and Private Internet Access are owned by our parent company, we nevertheless, examine all our products according to the same strict evaluation standards

In summary, I think Kape’s acquisition, should it be allowed to go ahead, will be very beneficial to Kape and its shareholders. However, things are not always as simple as an announcement leading to an acquisition — even very simple acquisitions can be instructed to be dissolved by the CMA or other global trade authorities. I would caution further buying at the extended premium reflected by the almost 30% jump in Kape’s shares today, as I would expect a likely case for anti-competitive practice to follow.

The Twenties Trader does not hold any shares in Kape Technologies plc.